Correlation Between Far Eastern and Formosa Chemicals

Can any of the company-specific risk be diversified away by investing in both Far Eastern and Formosa Chemicals at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Far Eastern and Formosa Chemicals into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Far Eastern New and Formosa Chemicals Fibre, you can compare the effects of market volatilities on Far Eastern and Formosa Chemicals and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Far Eastern with a short position of Formosa Chemicals. Check out your portfolio center. Please also check ongoing floating volatility patterns of Far Eastern and Formosa Chemicals.

Diversification Opportunities for Far Eastern and Formosa Chemicals

0.79

Correlation Coefficient

Far Eastern  Formosa Chemicals

Poor diversification

The 3 months correlation between Far and Formosa is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Far Eastern New and Formosa Chemicals Fibre in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Formosa Chemicals Fibre and Far Eastern is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Far Eastern New are associated (or correlated) with Formosa Chemicals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Formosa Chemicals Fibre has no effect on the direction of Far Eastern i.e., Far Eastern and Formosa Chemicals go up and down completely randomly.

Pair Corralation between Far Eastern and Formosa Chemicals

Assuming the 90 days trading horizon Far Eastern New is expected to generate 0.84 times more return on investment than Formosa Chemicals. However, Far Eastern New is 1.19 times less risky than Formosa Chemicals. It trades about -0.07 of its potential returns per unit of risk. Formosa Chemicals Fibre is currently generating about -0.09 per unit of risk. If you would invest  3,645  in Far Eastern New on September 11, 2024 and sell it today you would lose (270.00) from holding Far Eastern New or give up 7.41% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

Far Eastern New  vs.  Formosa Chemicals Fibre

Far Eastern New

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Far Eastern New has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest abnormal performance, the Stock's basic indicators remain stable and the latest fuss on Wall Street may also be a sign of long-term gains for the venture sophisticated investors.

Formosa Chemicals Fibre

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Formosa Chemicals Fibre has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest abnormal performance, the Stock's basic indicators remain stable and the latest fuss on Wall Street may also be a sign of long-term gains for the venture sophisticated investors.

Pair Trading with Far Eastern and Formosa Chemicals

The main advantage of trading using opposite Far Eastern and Formosa Chemicals positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Far Eastern position performs unexpectedly, Formosa Chemicals can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Formosa Chemicals will offset losses from the drop in Formosa Chemicals' long position.

The idea behind Far Eastern New and Formosa Chemicals Fibre pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

Check out your portfolio center.

Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..